Deck 8: Inventories and the Cost of Goods Sold

Question 1

A physical inventory is usually taken during a period of high activity.

Answer 1

False

Question 2

A write down of inventory due to obsolescence reduces the amount in the Inventory account and may increase the amount in the Cost of Goods Sold account.

Answer 2

True

Question 3

The principle of consistency prohibits a company from changing an inventory valuation method once one is selected.

Answer 3

False

Question 4

When the periodic inventory system is used,determining the cost of the year-end inventory involves two distinct steps: counting the units and pricing the units.

Question 5

If the terms of a sale are
F.O.B.shipping point,the sale should not be recorded until the goods are delivered to the buyer.

Question 6

An advantage of the average-cost method of accounting for inventory is that the inventory is valued in the balance sheet at current replacement costs.

Question 7

Any business that sells numerous units of identical products may determine its cost of goods sold using a cost flow assumption,rather than the specific identification method.

Question 8

In order to obtain the maximum tax benefit,companies that use a perpetual inventory system can restate their year-end inventory at costs indicated by periodic LIFO costing procedures.

Question 9

Merchandise sold
F.O.B.destination belongs to the buyer while in transit.

Question 10

An advantage to the LIFO method of accounting for inventory is that it values the cost of goods sold at current replacement costs.

Question 11

The LIFO conformity requirement permits a company to use LIFO for tax purposes only if the company also uses LIFO for internal reporting purposes.

Question 12

The inventory method used by a company will affect profitability by affecting the amount of income taxes a company owes.

Question 13

The cost flow assumption selected by a company must correspond to the actual physical movement of the company's merchandise.

Question 14

During periods of inflation,the LIFO cost flow assumption will yield a lower inventory value than FIFO.

Question 15

In a periodic system,the only account in regard to inventory that is kept up-to-date is the inventory account.

Question 16

Just-in-time inventory systems cannot be used in conjunction with the LIFO cost flow assumption.

Question 17

Companies with perpetual inventories need not take physical inventory counts because inventory amounts are perpetually available.

Question 18

During periods of inflation,the FIFO cost flow assumption will yield a higher cost of goods sold than LIFO.

Question 19

Because of the consistency principle,inventory should never be written down below cost.

Question 20

The specific identification method is acceptable only when the actual cost of individual units of merchandise can be determined from the accounting records.

Question 21

In a perpetual inventory system,two entries are normally made to record each sales transaction.The purpose of these entries is best described as follows:

A)One entry recognizes the sales revenue and the other recognizes the cost of goods sold.
B)One entry records the purchase of merchandise and the other records the sale.
C)One entry records the cost of goods sold and the other reduces the balance in the Inventory account.
D)One entry updates the subsidiary ledger and the other updates the general ledger.

Question 22

Which of the four inventory approaches transfers the most recent purchase cost to the cost of goods sold and the remaining items in inventory are valued at the oldest acquisition costs?

A)LIFO.
B)FIFO.
C)Average.
D)Specific identification.

Question 23

In a perpetual inventory system,an inventory cost flow assumption is used primarily for determining which costs to use in:

A)Recording purchases of inventory.
B)Recording the cost of goods sold.
C)Recording sales revenue.
D)Forecasts of future operating results.

Question 24

Which of the following is not considered an acceptable inventory cost method according to GAAP?

A)First-in,first-out.
B)First-in,last-out.
C)Last-in,first-out.
D)Average cost.

Question 25

Overstating the ending inventory will result in understating the cost of goods sold and overstating profits.

Question 26

Inventory:

A)Consists of all goods owned and held for sale to customers.
B)Is a non-financial asset.
C)Both consists of all goods owned and held for sale to customers and is a non-financial asset.
D)Both consists of all goods owned and held for sale to customers and is a financial asset.

Question 27

The retail inventory method requires a company to state inventory on the year-end balance sheet at its retail value.

Question 28

Which of the four inventory approaches is best suited to inventories of high-priced,low-volume items?

A)LIFO.
B)FIFO.
C)Average cost.
D)Specific identification.

Question 29

During periods of inflation,when comparing LIFO with FIFO:

A)LIFO inventory and cost of sales would be higher.
B)LIFO inventory and cost of sales would be lower.
C)LIFO inventory would be lower and cost of sales would be higher.
D)LIFO inventory would be higher and cost of sales would be lower.

Question 30

When prices are increasing,which inventory method will produce the highest cost of goods sold?

A)FIFO.
B)LIFO.
C)Average cost.
D)Cost of goods sold will not change.

Question 31

The gross profit method can be used for both interim and year-end financial reporting.

Question 32

Harris Corporation's inventory of a particular product includes 200 units purchased at a per-unit cost of $50,and another 100 units purchased at a unit cost of $60.If Harris sells 10 units of this product,the cost of goods sold will be:

A)$500.
B)$550.
C)$660.
D)The answer will depend upon the inventory cost flow assumption in use.

Question 33

In a periodic inventory system,understating the amount of ending inventory will cause an understatement of gross profit in the current year.

Question 34

In a periodic inventory system,overstating the amount of ending inventory will cause an understatement of gross profit in the following year.

Question 35

Kent Company has used the same inventory method for many years.This is an example of which principle?

A)Matching.
B)Realization.
C)Cost.
D)Consistency.

Question 36

In which of these inventory approaches is it important to determine the actual cost of a particular inventory item being sold in order to determine cost of goods sold?

A)LIFO.
B)FIFO.
C)Specific identification.
D)Weighted average cost.

Question 37

In the year following an overstatement of ending inventory,the year-end owners' equity will be correctly stated.

Question 38

The inventory turnover rate is equal to the average inventory divided by the cost of goods sold.

Question 39

A clothing store would logically have a higher inventory turnover rate than would a doughnut shop.

Question 40

The higher a company's inventory turnover rate,the higher its gross profit.

Question 41

A store that sells expensive custom-made jewelry is most likely to determine its cost of goods sold using:

A)Specific identification.
B)Average cost.
C)First-in,first-out.
D)Last-in,last-out.

Question 42

During a period of steadily falling prices,which of the following methods of measuring the cost of goods sold is likely to result in the lowest taxable income?

A)LIFO.
B)FIFO.
C)Average cost.
D)Specific identification.

Question 43

The primary advantage of a just-in-time inventory system is:

A)The amount of money tied up in inventory is minimized.
B)Customers are afforded a wider selection of merchandise available for immediate delivery.
C)The company is able to use the specific identification method of inventory pricing.
D)The risks of losing sales opportunities or of having to shut down manufacturing operations because of inventory shortages are minimized.

Question 44

The specific identification method is more appropriate than a cost flow assumption method:

A)For a large inventory of identical low-priced items.
B)If each item in the inventory is unique.
C)If purchase costs are rising.
D)If purchase costs are falling.

Question 45

Which of the following results in the cost of goods sold being stated at the most current acquisition costs?

A)Average cost.
B)Specific identification.
C)FIFO.
D)LIFO.

Question 46

In a perpetual inventory system,the flow of inventory cost is:

A)First through the income statement,then through the balance sheet.
B)First through the balance sheet,then through the income statement.
C)Only through the balance sheet and not the income statement.
D)Only through the income statement and not the balance sheet.

Question 47

With respect to the valuation of inventory and measurement of the cost of goods sold,the principle of consistency means that the same method should be applied:

A)In successive accounting periods.
B)By all companies in a given industry.
C)To all products in the inventory.
D)In financial statements and income tax returns.

Question 48

In a manufacturing company,the "just-in-time" concept of inventory management is best illustrated by:

A)Receiving deliveries of materials from suppliers just before the materials are used in the production process.
B)Completing the manufacturing process just before the deadline established by the customer.
C)An automated factory that reduces production time below that of other companies in the industry.
D)Selling finished products before they go out of style.

Question 49

The principle of consistency states that:

A)Companies are prohibited from ever changing their accounting methods.
B)Every company in the same industry must use the same accounting principle.
C)There must be a consistent blend to the accounting principles.
D)If changes in accounting principles are made,the reasons for the change and the effects on the company's net income must be disclosed.

Question 50

When the LIFO costing method is in use,the seller:

A)Must sell the most recently acquired units first.
B)Must sell the oldest unit in inventory first.
C)Assumes that the most recently acquired units are sold first.
D)Assumes that the oldest units in inventory are sold first.

Question 51

During periods of inflation,which method will yield the smallest ending inventory and the largest cost of goods sold?

A)LIFO.
B)FIFO.
C)Average cost.
D)Specific identification.

Question 52

During a period of steadily falling prices,which of the following methods of measuring the cost of goods sold is likely to result in reporting the highest gross profit?

A)Specific identification.
B)Average cost.
C)LIFO.
D)FIFO.

Question 53

Which of the following methods of measuring the cost of goods sold most closely parallels the actual physical flow of the merchandise?

A)LIFO.
B)FIFO.
C)Average cost.
D)Specific identification.

Question 54

Which of the following inventory approaches is not in accord with the physical flow of merchandise in most businesses?

A)LIFO.
B)FIFO.
C)Specific identification.
D)Average cost.

Question 55

In a period of rising prices,a company is most likely to use the FIFO method of pricing inventory if:

A)Each item in the inventory is unique.
B)Management wants the same unit cost assigned to items sold and items remaining in inventory.
C)Management's primary objective is to minimize income taxes.
D)Management wants the company's income statement to indicate the highest possible amounts of gross profit and net income.

Question 56

The "just-in-time" concept of inventory management is best illustrated by:

A)A clothing manufacturer that sells all of its finished goods before they go out of style.
B)A defense contractor that completes its projects within the deadlines set by its customer (the federal government).
C)A pharmaceutical firm that consistently brings new products to market ahead of its competitors.
D)A homebuilder who has its suppliers deliver lumber and other building materials to the building site the night before these materials will be used by the company's construction crews.

Question 57

Which of the following results in the inventory being stated at the most current acquisition costs?

A)Specific identification.
B)LIFO.
C)FIFO.
D)Average cost.

Question 58

The choice of inventory valuation method can help achieve each of the following independent goals,except:

A)Reduce cost of merchandise acquired from suppliers.
B)Increase reported net income.
C)Increase the inventory turnover rate.
D)Reduce the amount of income taxes owed.

Question 59

Which of the following statements is not a characteristic of the LIFO method of pricing inventory?

A)During a period of rising prices,LIFO tends to minimize the amounts of income taxes owed.
B)The cost of goods sold is measured in relatively current costs.
C)Inventory is valued at relatively current costs.
D)During a period of falling prices,LIFO tends to maximize the amounts of income taxes owed.

Question 60

In a period of rising prices,a company is most likely to use the specific identification method of pricing inventory if:

A)Each item in the inventory is unique.
B)Management wants the same unit cost assigned to items sold and items remaining in inventory.
C)Management's primary objective is to minimize income taxes.
D)Management wants the company's income statement to indicate the highest possible amounts of gross profit and net income.

Question 61

From an accounting point of view,one implication of an effective just-in-time inventory system is that:

A)Sales transactions must be recorded using on-line point-of-sale terminals.
B)Inventories are less material in dollar amount and alternative inventory flow assumptions will produce more similar results.
C)The cost of goods sold is significantly reduced.
D)Purchases of merchandise are recorded as cash payments are made,and sales transactions are recorded as cash is received.

Question 62

For the purpose of delaying income taxes,during an inflationary period,which method would be best?

A)LIFO.
B)FIFO.
C)Average cost.
D)Taxes would be the same under each assumption.

Question 63

Deep Check
Goods in transit between the buyer and the seller belong to:

A)The seller.
B)The buyer.
C)The freight company.
D)The answer depends upon whether the goods were shipped
F)O.B.destination.

Question 64

Green Leaf Company had the following information available on December 31: Management applies the LCM rule on the basis of inventory category and includes wheelbarrows and hoses in the large implement category and shovels and gloves in the small implement category.What is the write-down required?

A)$864.
B)$556.
C)$576.
D)$710.

Question 65

If the ending inventory is overstated in the current year:

A)Net income will be understated in the current year.
B)Next year's beginning inventory will also be overstated.
C)Next year's net income will be overstated.
D)Next year's beginning inventory will be understated.

Question 66

During periods of rising prices,and being primarily concerned with tax implications,most of the companies would select:

A)LIFO.
B)FIFO.
C)Specific identification.
D)The inventory valuation does not affect taxation.

Question 67

If all things are equal,except one company uses LIFO during inflation and the other uses FIFO,then:

A)The LIFO company will have a higher inventory turnover.
B)The FIFO company will have a higher inventory turnover.
C)The two companies will have the same inventory turnover.
D)Inventory valuation methods do not effect inventory turnover calculations.

Question 68

The lower-of-cost-or-market rule may be applied by comparing the market value of the inventory to the cost of the inventory based on:

A)Individual inventory items.
B)Major inventory categories.
C)The entire inventory.
D)Any of the three: individual inventory items,major inventory categories,or the entire inventory.

Question 69

The write-down of inventory:

A)Only affects the balance sheet and not the income statement.
B)Only affects the income statement and not the balance sheet.
C)Affects both the income statement and the balance sheet.
D)Affects neither the income statement nor the balance sheet.

Question 70

Many companies state in their annual reports that inventory is shown at the lower of its cost or market value.This means that the inventory:

A)Is obsolete.
B)Has been written down to a carrying value below cost.
C)Is shown at the lesser of cost or sales value.
D)Is valued at current replacement cost or historical cost,whichever is less.

Question 71

An advocate of just-in-time inventory system would say:

A)Maintain a large inventory selection for customers.
B)Leave extra time in order to make inventory deadlines.
C)Maintain a small inventory supply.
D)LIFO is preferred over FIFO.

Question 72

Green Leaf Company had the following information available on December 31: Management applies the LCM rule on the basis of the total inventory.What is the write-down required?

A)$864.
B)$556.
C)$576.
D)$710.

Question 73

In a periodic inventory system,recording a sale on account involves debiting which of the following accounts?

A)Only Accounts Receivable.
B)Accounts Receivable and Inventory.
C)Accounts Receivable and Cost of Goods Sold.
D)Accounts Receivable,Cost of Goods Sold,and Inventory.

Question 74

The primary reason a physical inventory is taken is to:

A)Adjust the perpetual inventory record for unrecorded shrinkage losses.
B)Ensure the periodic inventory record is valued correctly.
C)Both ensure the periodic inventory record is being stored securely and that it is valued correctly.
D)Ensure the perpetual inventory record is being stored in a secure manner.

Question 75

The logic behind the lower-of-cost-or-market rule is:

A)Inventory gradually becomes obsolete.
B)Inventory that is unsalable should be written down to zero (or its scrap value).
C)An asset is not worth more than it would cost the owner to replace it.
D)Inventory that is unsalable should be written down to its replacement cost.

Question 76

Green Leaf Company had the following information available on December 31: Management applies the LCM rule on the basis of individual inventory items.What is the write-down required?

A)$864.
B)$556.
C)$576.
D)$710.

Question 77

As a result of taking an annual physical inventory,it usually is necessary in a perpetual inventory system to make an entry:

A)Reducing assets and increasing the cost of goods sold.
B)Reducing assets and increasing liabilities.
C)Reducing the cost of goods sold.
D)Increasing assets and increasing the cost of goods sold.

Question 78

In a periodic inventory system,the cost of goods sold is determined as follows:

A)Year-end inventory,plus purchases during the year,less the inventory at the beginning of the year.
B)Net sales,less the balance in the Gross Profit account.
C)Cost of goods available for sale during the year,less the ending inventory.
D)A physical count is made of all items sold throughout the year,and a cost flow assumption is applied at year-end.

Question 79

The lower-of-cost-or-market rule:

A)Is used in conjunction with any inventory cost flow assumptions.
B)Cannot be used if LIFO or FIFO is also used.
C)Can be used in conjunction with LIFO but not FIFO.
D)Can only be used with the specific identification.

Question 80

In a periodic inventory system,recording a sale on account involves crediting which of the following accounts?

A)Only Sales.
B)Sales and Inventory.
C)Sales and Cost of Goods Sold.
D)Sales,Inventory,and Cost of Goods Sold.